Reserve to wait on rates cut

Peter Martin

THE Reserve Bank is expected to leave rates on hold, making this the first Melbourne Cup day in six years that rates will remain unchanged.

The Melbourne Cup day board meeting is traditionally favoured for rate moves because it follows the release of the September quarter consumer price index, which provides the first official reading on inflation each financial year.

This year the Reserve was so confident the inflation rate would not trouble it that it moved rates ahead of the release, in early October. Inflation has been at or below 2 per cent all year, even after the carbon tax.

The Reserve believes its three rate cuts this year - in May, June and October - are yet to have their full effect. It believes it is too early to tell whether the economy needs another set of back-to-back cuts. It is also conscious that international economic conditions have improved since its October meeting.

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Complicating the board's deliberations are retail figures released Monday showing no real growth in spending since the carbon tax compensation payments delivered in June.

September quarter retail spending was up just 0.6 per cent on the June quarter, but all of the increase was accounted for by a 0.7 per cent lift in prices, meaning the volume of goods bought actually fell.

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"Consumer demand and retail spending remain soft but are ticking over with no signs of further weakening," said Westpac economist Matthew Hassan.

"Consumers are worried about losing their jobs in a softening labour market, income growth is slowing and people are keen to pay down debt. The response to recent rate cuts has been tepid."

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Spending in Victoria grew by only 1.1 per cent, suggesting spending per person fell.

The ANZ's count of job advertisements slid 4.6 per cent in October, its seventh consecutive monthly decline. About 145,000 jobs per week were advertised in October, well down on the 170,000 per week a year before.

"Weaker job advertising and continuing job losses suggests continuing upward pressure on the unemployment rate,'' said ANZ head of economic research Ivan Colhoun. ''It will see the Reserve Bank cut rates further. We had been expecting a cut in December, but a move on Melbourne Cup day would not surprise."

Addressing a meeting of Group of 20 finance ministers in Mexico on Monday night, Treasurer Wayne Swan warned that the US economy was at risk whatever the outcome of its election.

"The so-called fiscal cliff will need to be dealt with as a matter of utmost urgency," he said, referring to the legislated expiry of multiple tax cuts tax cuts and spending programs on December 31. Failure to deal with this was likely to see the US thrust back into recession with the Congressional Budget Office putting the cost at 2 million jobs.